Is there a scope for exploiting the interplay between physical and financial el...
Is there a scope for exploiting the interplay between physical and financial electrisity markets?
Author(s):Maria Sandsmark, Kristin L. Munthe, Berit Tennbakk
Publisher:Molde University College
Report nr:Working Paper 2007:4
Isbn/Issn:82-7962-081-8 / 978-82-7962-081-5
The characteristics of electricity production and consumption make electricity markets highly susceptible to the exercise of unilateral market power. However, it is a recognized view that a well-functioning financial power market will contribute to a competitive price level in the associated physical market. But if producers are permitted to acquire so-called long positions, i.e. buy contracts for future purchases - as is the case at Nord Pool, the Nordic Power Exchange - the last argument may no longer be valid, and the market outcome could in stead be anti-competitive. By means of a simple two-period model, we find that a dominant hydro producer with storage capacity and superior private information has incentives to manipulate expectations about future electricity prices via strategic hydro scheduling, and thus gain an extra profit in the corresponding financial market.